NEW YORK (
) -- As
race towards $1,400 an ounce, investors scrambling to buy gold have many options.
Those looking for riskier exposure to the gold price are zeroing in on
Market Vectors Gold Miners Junior
, a basket of small-cap miners. The ETF is up 31.9% year to date outperforming the gold price, which is up 23% in the same time period. It ended Friday's regular trading session at $33.94, up 49 cents, or 1.5%.
Mining stocks can have as much as a 3:1 leverage to gold's spot price to the upside and downside.
Gold miners are risky because they trade with the broader equity market. Some tips to consider when picking gold stocks are to find companies with strong production and reserve growth. Make sure they have good management and inventory supported by either buying smaller companies or by maintaining consistent production. Global gold production has been declining since 2001 and big miners are keeping their gold reserves flush by buying or partnering with small-cap companies, which are in the exploration or development stage.
As gold prices rise, gold companies can make more for every ounce of gold they produce, but their net profits depend on their cash costs, or how much it costs them to produce an ounce of gold. Those factors vary from company to company and are subject to currency issues, energy costs and geopolitical factors.
>>Gold Miners Junior ETF: a Good Investment?
Finally, take into consideration how the company grows. There is a finite supply of gold in the ground. According to reports, gold discoveries have been falling by 4 million ounces each year for the past 30 years. To meet growing demand, companies either have to invest in an active exploration unit in hopes of striking gold, or have enough cash to buy a smaller company.
This trend makes junior miners a risky but possibly explosive investment. They are doing the actual exploring and digging for gold but often have no cash flow and must wait five to 10 years before a mine goes into production.
Investors opt for the gold miners junior ETF because picking a winning stock in this volatile bunch is hard. But does this vehicle really make you more money or would you be better off buying the individual stocks in the ETF?
Here's a look at the basic financials of the five largest holdings in the GDXJ that are publically traded in the U.S., how the stocks have performed of late, and Wall Street's opinion of where the shares are headed.
Allied Nevada Gold
represents 3.63% of the GDXJ, or 2,401,869 shares worth $53,945,977.74.
Allied Nevada Gold is a gold and silver producer with various early and advanced stage exploration projects in Nevada. Its Hycroft Mine completed its first year of production in 2009 and, according to the company's Web site, is producing at a per annum rate 100,000 ounces of gold and 300,000 ounces of silver. Allied Nevada is hoping to grow that rate to 300,000 ounces of gold and 1 million ounces of silver by 2013.
Allied Nevada's second-quarter net income rose to $20.79 million, or 26 cents a share, an improvement from a $6 million loss a year earlier. Net sales skyrocketed 874% and gross profit margin grew 13%. Gold production was 31,400 ounces and silver was 62,000 ounces at a total cash cost of $400-$450 per ounce for gold.
As of the second quarter, Allied Nevada had $346 million in cash and cash equivalents and $5.34 million in long-term debt, which is down 56% from the same period a year earlier. The company pays no dividend but according to
ratings team is very liquid and is unlikely to face financial difficulties over the short term.
Allied Nevada currently has six buy ratings, two holds and an average price target of $32.20. The stock trades at a forward looking price-to-earnings ratio of 41.85, well above the industry average of 21.60. Shares are up 53.3% year to date.
Allied Nevada ended Friday's trading session at $23.11, up 65 cents, or 2.9%.
Silver Standard Resources
represents 3.58% of the GDXJ which is 2,349,012 shares worth $53,299,082.28.
Silver Standard is one of the largest silver producers in the world with 15 exploration and production projects worldwide. Its Pirquitas mine in Argentina achieved production in December 2009. Once it reaches full production, the mine will produce an average of 8 to 10 million ounces of silver annually. Production for 2010 is expected to be 7 million ounces of silver at total cash costs of $14 an ounce.
In the second quarter, Silver Standard lost $15.2 million, or 19 cents a share, wider than its loss of $1.4 million a year earlier. Net sales skyrocketed to $14.09 million from zero a year earlier and gross profit margin grew to 24.73% also from zero a year ago. The company produced 1,692,466 ounces of silver in the second quarter.
As of the second quarter, Silver Standard had $79.45 million in cash and cash equivalents and $114.39 million in long-term debt, which is up 6.5% from the same period a year earlier. The company pays no dividend but according to
ratings team is very liquid and is unlikely to face financial difficulties over the short term.
An average of 37.5% of the ratings on the stock are buys, with four holds, one sell and an average price target of $28.50. The stock trades at a forward-looking P/E ratio of 49.90, well above the industry average of 25.60. Shares are up 5.9% this year. Silver Standard rose 47 cents, or 2.1%, to $23.16 at the end of the trading session Friday.
Coeur D'Alene Mines
represents 3.53% of the GDXJ, or 2,690,394 shares worth $52,516,490.88.
Coeur D'Alene Mines has explosive potential as a gold and silver producer. In 2010, the company is hoping to produce 17.3 million ounces of silver and 170,000 of gold at cash costs of $4 and $490, respectively. Its Kensington gold mine in Alaska recently came into production making the company 50/50 in terms of gold and silver.
In the second quarter, Coeur D'Alene Mines reported a net loss of $50.74 million, or 57 cents a share, down from a $11.61 million gain a year earlier. Net sales grew 48% from a year earlier and gross profit margin grew almost 50%. Gold production surged 68% while silver production rose 7%. Despite positive sales and gross margin growth, Coeur D'Alene Mines suffered a loss due to a mark-to-market adjustment with regard to its royalty agreement with
. Coeur D'Alene Mines is using the money to complete construction on a new mine at its Palmarejo project in Mexico.
As of the second quarter, Coeur D'Alene Mines had $41.19 million in cash and total equivalents with $218.8 million in long-term debt.
ratings team says Coeur D'Alene Mines has very weak liquidity and thinks the company will struggle to cover any short-term cash that it needs despite the fact that its cash flow is slowly improving.
Coeur D'Alene Mines currently has five buy ratings, five holds and one sell on its stock with an average price target of $23.64. Shares are trading at a forward-looking P/E ratio of 14.10, well below the industry average. Shares are up 9.1% year to date. Coeur D'Alene Mines gained 18 cents, or 0.9%, to $19.70 on Friday.
represents 3.38% of the GDXJ, or 7,638,464 shares worth $50,337,477.76.
Hecla Mining is one of the lowest-cost silver producers in the world. In the second quarter, the company produced silver at a negative cash cost of $1.82 an ounce helped by byproduct credits. Hecla has two working silver mines: Greens Creek in Alaska and Lucky Friday in Idaho, which produced 1.8 million and 797,385 ounces of silver, respectively. The miner will report third-quarter earnings on Tuesday.
In the second quarter, Hecla Mining earned $17.08 million. After a dividend payout to its preferred stock holders, the company made $13.7 million, or 6 cents a share. Hecla's preferred stock will be converted to common stock in January 2011. Net sales grew 19% from a year earlier to $88.63 million.
As of the second quarter, Hecla Mining had $197.38 million in cash and cash equivalents and $4.66 million in long-term debt, which is down 88% from a year earlier. Its cash flow was $54 million, the second highest in the company's 119-year history due to negative cash costs and almost record-high silver prices.
ratings team says the company is very liquid and is unlikely to face financial difficulties over the short term.
An average of 54.55% ratings on the stock are holds with four buy ratings and one sell and an average price target of $7.39. The stock trades at a forward-looking P/E ratio of 22.52, just slightly above the industry average of 16.12. Shares are up 8.4% year to date. Hecla Mining concluded Friday's regular trading session at $6.70, up 11 cents, or 1.7%.
represents 3.13% of the GDXJ, or 5,160,003 shares worth $46,491,627.03.
NovaGold trades like a junior but is valued like a senior with a $2.06 billion market cap. NovaGold has two huge projects Donlin Creek and Galore Creek both of which are 50% owned by
, respectively. At the earliest, the projects will come on stream by 2015 and until then the cost to NovaGold is $4 billion total, but when producing each mine could generate 1 million ounces of gold a year, half of which belongs to NovaGold. Upon these valuations, 10 shares of the company should roughly equally 1.2 ounces of gold, but the problem is that NovaGold isn't generating any cash and isn't a producer. According to the most recent 13F filings,
currently owns 9.1% of the company.
In the third quarter, NovaGold lost $147.6 million, or 66 cents a share, which is down 715% from the same period a year ago. The company said this loss was due to non-cash asset costs and an inventory write-down at its Rock Creek project in northwest Alaska. Net revenue was $300,000, unchanged from a year earlier.
As of the third quarter, NovaGold had $172.78 million in cash and cash equivalents and $128.09 million in long-term debt, which is up 3% from a year earlier. NovaGold's expenses were $28.2 million, up 34% from a year earlier. The increase was primarily due to higher exploration expenses and gas pipeline studies at Donlin Creek.
ratings team says that NovaGold is very liquid and is unlikely to face financial difficulties over the short term.
An average of 66.67% ratings on the stock are holds. There are currently no buy ratings and one sell with an average price target of $7.18. A P/E ratio isn't available for the stock because the company won't generate any income next year.
Shares are up 56.1% year to date. NovaGold ended Friday's regular trading session at $9.57, up 56 cents, or 6.2% higher.
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Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.